Not investment advice. Educational reading. See Disclaimer.
L.5 · ADVANCED · 2 MIN
Capital Structure Optimization: Finding the Sweet Spot
Optimal capital structure minimizes WACC and maximizes enterprise value. But ‘optimal’ is not a single number — it’s a range defined by credit ratings, covenant capacity, industry norms, and strategic flexibility.
Theory says maximize debt until the tax shield equals marginal distress cost. Practice says maintain a buffer for bad times. The companies that go bankrupt are often those that optimized capital structure for good times only.
§ 03Try it
Compare leverage ratios across a peer group in **Fundamentals**. Is the most leveraged company the cheapest (lowest WACC) or is it priced at a discount due to distress risk?
§ 04Check-in
A CFO proposes taking leverage from 2x to 5x Debt/EBITDA to lower WACC. What’s the risk?
§ 05Key insight
The best capital structures are not the most aggressive — they’re the ones that survive downturns without requiring dilutive equity raises or fire sales. Resilience is more valuable than optimization.
§ 06Check-in
Optimal capital structure — is it the leverage ratio that MAXIMIZES ROE, or MINIMIZES WACC?
Check your understanding
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Sit with the ideas.
A BBB-rated industrial company has Net Debt/EBITDA of 3.2x, interest coverage of 4.5x, and its sector median for BBB is 2.5-3.5x leverage. Management proposes a leveraged recapitalization to buy back shares, pushing leverage to 4.5x. What is the likely consequence?
